Interest rates won’t stay high forever. Here’s how to make them work for you now

The Federal Reserve on Wednesday did it again. For the fourth meeting in a row, it left its key interest rate at a 23-year-high, as Fed observers and market watchers continue to place bets on when the central bank will start cutting rates.

The going assumption is rate cuts will be coming sometime this year. But not yet. That means there is still time to park your cash in a high-rate vehicle since the Fed’s benchmark lending rate influences — directly or indirectly — interest rates on financial accounts and products throughout the US economy.

Here are low-risk options to get the best yield on funds you plan to use within two years, and also on cash you expect to need within the next two to five years.

High-yield online savings accounts

The average annual percentage yield on bank savings accounts was just 0.57% on January 30, according to a Bankrate survey. That average is kept low by the biggest brick-and-mortar banks like JPMorgan Chase and Bank of America, which have been offering rates as low as 0.01%.

But many online FDIC-insured banks are still offering 5% or more on their high-yield savings accounts.

Those accounts are a great place to deposit money that you will likely deploy within the next two years — to cover anything from a planned vacation or big purchase to an emergency expense or an unexpected change of circumstance like a job loss.

As with any bank savings rate, high-yield savings account rates can change overnight, and the bank may not alert you when it lowers it. So make sure to check your monthly statement.

Money market accounts and funds

If you don’t want to set up an online savings account at another bank, your own bank may offer you a money market deposit account that pays a higher yield than your regular checking or savings accounts.

Money market accounts may have higher minimum deposit requirements than a regular savings account, but they are more liquid than a fixed-term certificate of deposit or Treasury bill, meaning they give you access to your money more quickly while still potentially giving you some of the highest yields available, said Doug Ornstein, senior manager for integrated solutions at TIAA Wealth Management.

But don’t confuse money market accounts with money market mutual funds, which invest in short-term, low-risk debt instruments. As of January 29, they had an average 7-day yield of 5.16%, according to the Crane Money Fund Index, which tracks the top 100 taxable money market funds.

Unlike money market deposit accounts, money market mutual funds are not insured by the FDIC. But if you invest in a money market fund through a brokerage, your overall account is likely to be insured through the Securities Investor Protection Corp, which offers protection in the event your brokerage ever goes under.

Certificates of deposits

Another high-return, low-risk investment that is great for money you likely won’t need to tap for a few months or even a couple of years are certificates of deposit.

You can get the best returns on CDs through a brokerage such as Schwab, E*Trade or Fidelity. That’s because you can comparison shop for CDs from any number of FDIC-insured banks and will not have to set up individual accounts with each institution.

To get the greatest benefit from a CD, you have to leave the money invested for a fixed period. You can always access your principal sooner if you need to, but if you do you will forfeit at least some interest.

“The Fed will transition to cutting interest rates this year, so now is the time for savers to lock in CDs, especially maturities longer than one year. CD yields have peaked and have begun to pull back so there is no advantage to waiting if you have the money to deploy right now,” said Greg McBride, chief financial analyst at Bankrate.

Ken Tumin, founder of DepositAccounts.com, concurred. “It makes sense to go long with CDs. To hedge your bets, include terms from one to five years. Starting a CD ladder will provide this mix,” he said.

But if you choose a longer term CD, be aware there may be early withdrawal penalties if you need to take the money out sooner.

As of January 30, CDs listed on Schwab.com with durations of three months, six months, nine months, one year, 18 months and two years were all yielding between 5% and 5.21%. Bankrate listed CDs paying as high as 5.51%.

Say you invest $10,000 in a one-year CD with a 5.3% APY. At the end of that period, you’d get your principal back plus $530 in interest when the CD matures, according to Bankrate’s CD calculator. If you chose a 2-year CD at 5%, you’d bank $1,020 in interest.

If you don’t go through a brokerage you may get a reasonable deal from your primary bank, Tumin said.

For example, he noted, Wells Fargo came out with a 7-month CD Special with a rate of up to 5.01% APY.

But he cautions that with any big bank CD you should take your money out at the end of the term, otherwise your bank may automatically renew it and lock you in to a much lower-yielding CD.

Treasury bills

Another option for money you can leave untouched anywhere from several months to a few years are short-term Treasury bills, which are backed by the full faith and credit of the United States.

Three- and six-month bills had yields of 5.20% and 5.09% respectively on January 30 before the Fed’s meeting ended, while nine-month and one-year bills were offering 4.96% and 4.84% respectively, according to rates posted on Schwab.com for a $25,000 investment.

If you’re someone who manages your portfolio like a hawk, you may feel comfortable buying T-bills on your own from TreasuryDirect.gov. But if you don’t, it might be easier just to buy new issues through your brokerage account or invest in a short-term bond index fund or ETF, said Andy Smith, executive director of financial planning at Edelman Financial Engines.

And if you’re looking at money that will be needed in three to five years, you might consider a diversified fund of highly rated government and corporate bonds, Ornstein said. Yields on three-year AAA-rated corporate bonds, for instance, were yielding 4.15% this week, while three-year AAA-rated municipal bonds (which are issued by local governments) had a rate of 3.58%, according to Schwab.com.

Don’t chase yield

When deciding on the best accounts and investments for your specific goals and peace of mind, it may pay to consult a fee-only fiduciary adviser — meaning someone who doesn’t get paid a commission to sell you a particular investment.

What you’ll always want to do is build in flexibility for yourself so you can easily access cash, regardless of your timeline for key goals. “What happens if something changes and you need that down payment a lot sooner — or your parents need medical care fast?” Smith said.

That means balancing your desire for great yield with a need and desire for ease of access without penalty. Translation: Don’t chase yield for yield’s sake.

Think of it this way, Ornstein said: Unless you have huge sums to invest or are an institutional investor, the difference between getting a 5.1% yield versus 5% is negligible, and in fact it could even cost you more if there are penalties for taking your money out early. “Most of the time convenience is really important. Give up the 0.1%,” he advised.

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